RBI's Warning and Debt Management Strategies

The Reserve Bank of India (RBI), in its Financial Stability Report, highlighted the risk of consumer credit stress potentially affecting secured loans. It was noted that many individuals carrying unsecured credit card and personal loans also have secured loans like home or vehicle loans, which could be classified as non-performing if defaults occur.

Strategies for Reducing Debt Burden

• Merge Multiple Loans
  • Consolidate various loans into one with a lower interest rate.
  • A top-up loan on a home loan can help pay off high-interest credit card dues and personal loans.
  • Interest rates: 
    • Credit card dues: 36–42%
    • Personal loans: 10–31%
    • Top-up home loans: Slightly higher than home loans by 0.5-1 percentage point.
  • Other consolidation options: Loans against securities/property.
  • Debt consolidation loans: 
    • Interest rate: 12–14% depending on credit score and tenure.
    • Restrictions: Often restricted to repaying existing loans with no further borrowing allowed until repayment.
• Pay Highest-Cost Debt First (Avalanche Method)
  • Prioritize high-interest loans like credit card dues.
  • Pay minimum on all loans to avoid default and use surplus to clear high-cost loans.
• Pay Smallest Loan First (Debt Snowball Method)
  • Focus on clearing the smallest loan for a psychological victory.
  • Frees up cash to tackle larger, higher-cost loans.

Key Points to Remember

• Avoid further borrowing and EMI-based purchases.
• Be cautious of high interest rates and penalty charges from defaults.
• Avoid risky investments like equities or cryptocurrencies for debt resolution.
• Consider asset monetization like gold or mutual funds if default is imminent.
• Maintain a good credit score for future borrowing.
• Ensure EMIs do not exceed 30-40% of take-home salary.
• Build a contingency fund equal to at least six months’ expenses.

Budgeting Tips for Debt Management

• Create and strictly adhere to a budget.
• Evaluate all income sources including salary, incentives, and rental income.
• Prioritize paying fixed costs like EMIs, utilities, and school fees first.
• Plan shopping trips with a list to avoid impulse purchases.
• Cut down on non-essential spending such as entertainment and dining out.